Wall Street Firms Build A Single-Family Rental Giant, But It's Still A Minnow In Housing Market

Invitation Homes and Starwood Waypoint Homes are merging, creating a single-family rental behemoth and doubling down on Wall Street's bet that in post-housing-crisis America renting would become more popular. The combined company will own 82,000 homes in 17 markets and be valued at approximately $11 billion. It will operate under the Invitation Homes banner and Starwood Waypoint CEO Fred Tuomi will lead the company.

In the "merger-of-equals," Starwood Waypoint Homes shareholders will receive 1.614 Invitation Homes shares. No cash will be exchanged and the deal is designed to be tax-free. The combined companies are expected to have a market capitalization of around $11 billion and a total enterprise value (net of debt) of around $20 billion. In the second quarter of 2017 the combined company had 95% occupancy and 7% same-unit net rental income growth.

Invitation Homes grew out of the Blackstone Group. Starting in 2012, the private equity giant spent an estimated $9.6 billion buying 50,000 homes on the cheap and renting them out. In February of this year, Blackstone took Invitation public in an offering that raised $1.8 billion. Starwood Waypoint's portfolio of 30,000 homes was formed in January 2016, when Colony American Homes and Starwood Waypoint Residential Trust completed a $7.7 billion merger.

Blackstone will own 41% of the combined company, down from 70% of Invitation Homes currently.

The latest merger represents a consolidation of bets made by three real estate investment giants and creates a true Wall Street landlord for the first time in recent memory. The larger size should be good for investors, creating economies of scale in an operationally intense business.

Together Invitation and Starwood Waypoint have spent close to $2 billion on renovations and maintenance of homes, or about $22,000 per home. More than two-thirds of the company's combined revenue will come from Florida and Western states, with an average of 4,800 homes per market.

The companies recognize the advantages of scale. In a release announcing the deal Tuomi noted, "This merger creates the leading single-family rental company in the United States, which will be uniquely positioned to deliver exceptional service to residents, while also improving operating efficiency." Current Invitation CEO John Bartling added, "By bringing together these two world-class organizations, Invitation Homes will continue building on its industry-leading operational capabilities and resident-centric approach – while also providing enhanced liquidity to stockholders."

Up for debate is whether consolidation is good for renters and the broader housing market. Critics argue Wall Street investment in single-family homes has exasperated the inventory shortfall that has plagued the housing market recently. The merging companies counter that, while the new Invitation has the largest single-family rental portfolio in the nation, it represents less than 0.1% of the 90 million single-family homes across the United States. Most of the 16 million single-family homes for rent are owned by individuals or small enterprises.

Shares of Invitation and Starwood Waypoint popped more than 4% in early trading Thursday. Shares of American Homes 4 Rent, which will become the second largest player in the space, were up 1.6%.